State of Kosrae Federated States of Micronesia KOSRAE UTILITIES AUTHORITY P.O. Box KUA TEL: (691) 370-3799/3344 Kosrae, FM 96944 FAX: (691) 370-3798 June 8, 2017 Deloitte & Touche LLP P.O. Box 753 Kolonia, Pohnpei 96941 We are providing this letter in connection with your audits of the financial statements of Kosrae Utilities Authority (KUA), a component unit of the State of Kosrae, which comprise the statements of net position as of September 30, 2016 and 2015, and the related statements of revenues, expenses and changes in net position and of cash flows for the years then ended, for the purpose of expressing an opinion as to whether the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of KUA in conformity with accounting principles generally accepted in the United States of America (GAAP). We confirm that we are responsible for the following: a. The preparation and fair presentation in the financial statements of financial position of KUA in conformity with GAAP. b. The design, implementation, and maintenance of internal control: Relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error To prevent and detect fraud. c. Establishing and maintaining effective internal control over financial reporting. d. The review and approval of the financial statements and related notes and acknowledge your role in the preparation of this information. Specifically, we acknowledge that your role in the preparation of financial statements was a matter of convenience rather than necessity. We have reviewed the financial statement preparation assistance provided by you and acknowledge that the financial statements are prepared in accordance with GAAP. Our review was based on the use of the financial statement disclosure checklist for a business-type entity obtained from the Government Finance Officers Association. Certain representations in this letter are described as being limited to matters that are material. Items are considered material, regardless of size, if they involve an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement.
We confirm, to the best of our knowledge and belief, the following representations made to you during your audits. 1. The financial statements referred to above are fairly presented in conformity with GAAP. In addition: a. The financial statements include all component units as well as joint ventures with an equity interest, and properly disclose all other joint ventures and other related organizations. b. Net position components (net investment in capital assets; restricted; and unrestricted) are properly classified and, if applicable, approved. c. Deposits and investment securities are properly classified in the category of custodial credit risks. d. Capital assets, including infrastructure assets, are properly capitalized and reported and depreciated e. Required supplementary information is measured and presented in prescribed guidelines; and f. Applicable laws and regulation are followed in adopting, approving and amending budgets. 2. KUA has provided to you all relevant information and access as agreed in the terms of the audit engagement letter. 3. KUA has provided you: a. Contracts and grant agreements (including amendments, if any). b. Financial records and related data for all financial transaction of KUA. The records, books and accounts, as provided to you, record the financial and fiscal operations of KUA and provide the audit trail to be used in a review of accountability. Information presented in financial reports is supported by the books and records from which the financial statements have been prepared. c. Resolutions and minutes of the meetings of the Board of Directors or summaries of actions of recent meetings for which minutes have not yet been prepared. Board meetings were held on the following dates: February 4, 2016 February 11, 2016 March 7, 2016 March 8, 2016 April 11, 2016 April 26, 2016 June 22, 2016 July 20, 2016 September 12, 2016 September 13, 2016 September 19, 2016 October 13, 2016 December 15, 2016 December 20, 2016 January 6, 2017
4. There have been no: a. Action taken by KUA management that contravenes the provisions of federal laws and FSM laws and regulations, or of contracts and grants applicable to KUA. b. Communications from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices or other matters that could have a material effect on the financial statements. 5. KUA has not performed a formal risk assessment, including the assessment of the risk that the financial statements may be materially misstated as a result of fraud. However, management has made available to you their understanding about the risks of fraud in KUA and do not believe that the financial statements are materially misstated as a result of fraud. 6. We have no knowledge of any fraud or suspected fraud affecting KUA involving: a. Management b. Employees who have significant roles in internal control over financial reporting c. Others, if the fraud could have a material effect on the financial statements. 7. We have no knowledge of any allegations of fraud or suspected fraud affecting KUA received in communications from employees, former employees, regulators, or others. 8. We are not aware of any pending or threatened litigation, claims, or assessments, or unasserted claims or assessments that are required to be accrued or disclosed in the financial statements in accordance with GASB Codification Section C50, Claims and Judgments, and we have not consulted a lawyer concerning litigation, claims, or assessments, or potential litigation or unasserted claims or assessments during the years ended September 30, 2016 and 2015, and up to the date of this letter. 9. Significant assumptions used by us in making accounting estimates are reasonable. 10. We are responsible for the compliance with local and FSM laws, rules and regulations, and provisions of grants and contracts relating to KUA s operations. We are responsible for establishing and maintaining the components of internal control relating to our activities in order to achieve the objectives of providing reliable reports, effective and efficient operations, and compliance with laws and regulations. KUA is responsible for maintaining accounting and administrative control over revenues, obligations, expenditures, assets, and liabilities. 11. Management has identified and disclosed to you all laws and regulations that have a direct and material effect on the determination of financial statement amounts. Except where otherwise stated below, immaterial matters less than $12,284 collectively are not considered to be exceptions that require disclosure for the purpose of the following representations. This amount is not necessarily indicative of amounts that would require adjustment to, or disclosure in, the financial statements.
12. There are no transactions that have not been properly recorded in the accounting records underlying the financial statements. 13. During the year ended September 30, 2016, KUA implemented the following pronouncements: GASB Statement No. 72, Fair Value Measurement and Application, which addresses accounting and financial reporting issues related to fair value measurements and requires entities to expand their fair value disclosures by determining major categories of debt and equity securities within the fair value hierarchy on the basis of the nature and risk of the investment. The implementation of this statement required additional disclosures to be made about fair value measurements, the level of fair value hierarchy, and valuation techniques. GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, which eliminates two of the four categories of authoritative GAAP that exist under the existing hierarchy prescribed by Statement No. 55. The two categories that will remain under the new standard are (1) GASB Statements and (2) GASB technical bulletins and implementation guides in addition to AICPA guidance that the GASB clears. The implementation of this statement did not have a material effect on the accompanying financial statements. GASB Statement No. 79, Certain External Investment Pools and Pool Participants, addresses for certain external investment pools and their participants the accounting and financial reporting implications that result from changes in the regulatory provisions referenced by previous accounting and financial reporting standards. Those provisions were based on the Investment Company Act of 1940, Rule 2a7. Rule 2a7 contains the Securities and Exchange Commission s regulations that apply to money market funds and were significantly amended in 2014. The implementation of this statement did not have a material effect on the accompanying financial statements. In June 2015, GASB issued Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not Within the Scope of GASB Statement No. 68, and Amendments to Certain Provisions of GASB Statements No. 67 and No. 68, which aligns the reporting requirements for pensions and pension plans not covered in GASB Statements No. 67 and No. 68 with the reporting requirements in Statement No. 68. The provisions in Statement No. 73 are effective for fiscal years beginning after June 15, 2016. Management does not believe that the implementation of this statement will have a material effect on the financial statements. In June 2015, GASB issued Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, which replaces Statements No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans, and addresses financial reporting requirements for governments whose employees are provided with postemployment benefits other than pensions (other postemployment benefits or OPEB). The provisions in Statement No. 74 are effective for fiscal years beginning after June 15, 2016. Management does not believe that the implementation of this statement will have a material effect on the financial statements. In June 2015, GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, which replaces the requirements of Statements No. 45, Accounting and Financial Reporting by
Employers for Postemployment Benefits Other Than Pensions, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans, and provides guidance on reporting by governments that provide OPEB to their employees and for governments that finance OPEB for employees of other governments. The provisions in Statement No. 75 are effective for fiscal years beginning after June 15, 2017. Management does not believe that the implementation of this statement will have a material effect on the financial statements. In August 2015, GASB issued Statement No. 77, Tax Abatement Disclosures, which requires governments that enter into tax abatement agreements to disclose certain information about the agreements. The provisions in Statement No. 77 are effective for fiscal years beginning after December 15, 2015. Management does not believe that the implementation of this statement will have a material effect on the financial statements. In December 2015, GASB issued Statement No. 78, Pensions Provided through Certain Multiple-Employer Defined Benefit Pension Plans, which addresses a practice issue regarding the scope and applicability of Statement No. 68, Accounting and Financial Reporting for Pensions. The provisions in Statement No. 78 are effective for fiscal years beginning after December 15, 2015. Management does not believe that the implementation of this statement will have a material effect on the financial statements. In January 2016, GASB issued Statement No. 80, Blending Requirements for Certain Component Units - an amendment of GASB Statement No. 14, which improves financial reporting by clarifying the financial statement presentation requirements for certain component units. The provisions in Statement No. 80 are effective for fiscal years beginning after June 15, 2016. Management does not believe that the implementation of this statement will have a material effect on the financial statements. In March 2016, GASB issued Statement No. 81, Irrevocable Split-Interest Agreements, which improves accounting and financial reporting for irrevocable split-interest agreements by providing recognition and measurement guidance for situations in which a government is a beneficiary of the agreement. The provisions in Statement No. 81 are effective for fiscal years beginning after December 15, 2016. Management does not believe that the implementation of this statement will have a material effect on the financial statements. In March 2016, GASB issued Statement No. 82, Pension Issues - an amendment of GASB Statements No. 67, No. 68, and No. 73, which addresses issues regarding (1) the presentation of payroll-related measures in required supplementary information, (2) the selection of assumptions and the treatment of deviations from the guidance in an Actuarial Standard of Practice for financial reporting purposes, and (3) the classification of payments made by employers to satisfy employee (plan member) contribution requirements. The provisions in Statement No. 82 are effective for fiscal years beginning after June 15, 2016. Management does not believe that the implementation of this statement will have a material effect on the financial statements. 14. Regarding required supplementary information: a. We confirm that we are responsible for the required supplementary information. b. The required supplementary information is measured and presented in accordance with GASB Codification Section 2200, Comprehensive Annual Financial Report.
c. The methods of measurement and presentation of the supplementary information have not changed from those used in the prior period. 15. KUA has no plans or intentions that may affect the carrying value or classification of assets and liabilities. 16. The following, to the extent applicable, have been appropriately identified, properly recorded, and disclosed in the financial statements: a. Related-party transactions and associated amounts receivable or payable, including sales, purchases, loans, transfers, leasing arrangements, and guarantees (written or oral). b. Guarantees, whether written or oral, under which KUA is contingently liable. 17. In preparing the financial statements in conformity with GAAP, management uses estimates. All estimates have been disclosed in the financial statements for which known information available prior to the issuance of the financial statements indicates that both of the following criteria are met: a. It is at least reasonably possible that the estimate of the effect on the financial statements of a condition, situation, or set of circumstances that existed at the date of the financial statements will change in the near term due to one or more future confirming events. b. The effect of the change would be material to the financial statements. 18. Risks associated with concentrations, based on information known to management, that meet all of the following criteria have been disclosed in the financial statements: a. The concentration exists at the date of the financial statements. b. The concentration makes the enterprise vulnerable to the risk of a near-term severe impact. c. It is at least reasonably possible that the events that could cause the severe impact will occur in the near term. 19. There are no: a. Instances of identified or suspected noncompliance with laws and regulations whose effects should be considered when preparing the financial statements. b. Known actual or possible litigation and claims whose effects should be considered when preparing the financial statements that have not been disclosed to you and accounted for and disclosed in accordance with GAAP. c. Other liabilities or gain or loss contingencies that are required to be accrued or disclosed by GASB Codification Section C50, Claims and Judgments. 20. KUA has satisfactory title to all owned assets, and there are no liens or encumbrances on such assets nor has any asset been pledged as collateral except as disclosed in Note 6 to the financial statements.